MPEL: COULD THEY FINALLY BEAT A QUARTER?

The “crew that couldn’t get their act together” appears to have gotten their act together. We first highlighted the potential for sustained market share gains in late July. MPEL gained significant share that month, gained even more in August, and is poised to take another step forward in September. Gaining market share while the market grows 40-70% is impressive, particularly for a company held in such low esteem by the investment community.

Given the strong market growth in Macau this quarter as well as an estimated 250bp sequential increase in market share to 16.0%, we think MPEL can post EBITDA of $120 million. Consensus is only $100 million. Our Q4 estimate of $92 million is also higher than the Street at $88 million.

City of Dreams drives most of the company’s revenues and profits and has been the market share driver. So what’s driving the market share gains? On the Mass side, we believe the reconfiguration of the slot floor earlier this year has created a busier and more exciting feel. Too much space can be a bad thing for a casino. Also, management was very promotional in the first half, particularly in Q2, which seems to be paying dividends.

On the VIP side where the market share gains have been more pronounced, aggressive junket commissions have certainly helped although we do not think Q3 commission rates and VIP promotional activity have increased. Rather, we think MPEL may be advancing junket commissions for 3-4 months. Essentially, they are providing more credit to the junkets. This should have the impact of better margins than a straight commission increase, but may create longer term credit risk. For now, we are not worried.

While 16% market share was probably aided by high hold, particularly in September, we think a 15%+ share is probably sustainable and is likely above investor expectations. Sure the stock has moved up significantly off its sub $4 in late July when we first turned positive on the name. However, MPEL remains discounted to the group--10.5x 2011 EV/EBITDA versus 12.5-14.5x, and EBITDA estimates could go higher. There is still 25% upside to the low end of that range, without the benefit of higher numbers.

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09/29/10 09:33 AM EDT

JACK – REAL-TIME COMMENTS

Updated sales guidance implies that Jack in the Box trends are at least stabilizing.

Management stated at an investor conference this morning that it does not expect to see a significant improvement in Jack in the Box top-line trends until the unemployment picture improves in its key regions. That being said, with less than one week left in the company’s fiscal 4Q10, management said that same-store sales are tracking slightly better the company’s most recent quarterly guidance. For reference, JACK guided to a 4.5% to 5.5% decline in comp sales at Jack in the Box. A -4.5% comp implies two-year average trends that are relatively stable with 3Q10. The company attributed the better-than-expected trends to its strong promotional calendar and better service execution.

Howard Penney

Managing Director

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09/29/10 09:08 AM EDT

R3: JCP, ANF, BONT, PSS, and E-com

R3: REQUIRED RETAIL READING

September 29, 2010

More evidence that e-commerce continues to rise in importance to the overall retail sector, as positive data from Shop.org supports a building trend. And, finally JCP decides to call it quits on paper-based catalogs next year, instead planning to focus exclusive on the internet for its direct business.

RESEARCH ANECDOTES

Add Donna Karan to the list of brands entering the world of e-commerce for the first time. The site features an extensive selection of apparel and accessories from the higher-end “New York” line as well the moderate DKNY line.

For the first time, a female has designed a pair of Air Jordans for Nike. The lavender limited edition Ladies Air Jordan 2 Retro shoes were designed by Vaq$htie Kola, former girlfriend of hip-hop star Pharrell. Hard to believe the idea of a female designing for a female is a new concept at the world’s largest athletic footwear company.

According to Nielsen, IPad owners are the most male-dominated group of mobile computing owners. 65% of owners of the hot new device are male and 63% are under the age of 34. Surprisingly, the Playstation Portable skews slightly more female than the iPad, with just 63% of its owners being male. What does all this mean? At least for now, a whole lot of male targeted advertising will begin making its way onto the iPad very soon.

OUR TAKE ON OVERNIGHT NEWS

JC Penney Steps Ups Store Growth - J.C. Penney Co. Inc. on Tuesday said it will open three stores next year as part of its plan to generate $1 billion in sales growth through new retail expansion over the next five years. Penney’s long term plans call for opening 75 new stores by 2014. The first three stores are slated for Dallas; Daly City, Calif., which borders San Francisco, and Glenarden, Md., about 10 miles east of Washington. Penney’s has existing stores in all three markets, which cater to middle-income shoppers. While Wal-Mart Stores Inc. slowed construction of SuperCenters amid the weakening economy and Gap Inc. has said it’s not planning to open new stores in the near term, Penney’s believes the markets it’s identified are underserved by its stores, so it will intensify its presence. <wwd.com>

Hedgeye Retail’s Take: While this technically counts as “stepped up” growth, it’s hardly worthy of a press release. Three store openings in 2011 implies there are 72 additional locations needed to reach the company’s goal by 2014. Recall that JCP hasn’t opened a meaningful amount of new stores in years, leaving this goal to appear lofty (and back-end weighted) at best.

JCP Getting Out of Catalog Business - Just 10 months after axing its twice-yearly Big Book, J.C. Penney Co. is getting out of the catalog business altogether. In 2011, J.C. Penney will cease publishing about 25 other specialty catalogs, says a spokeswoman. Instead, J.C. Penney, No. 16 in the Internet Retailer Top 500, will publish more direct marketing pieces such as its 43-page “Little Red Book” and “Matter of Style” publications that showcase current merchandise such as men’s and women’s fashions available in the chain’s 1,107 department stores in the U.S. and Puerto Rico and online at JCP.com. “We will no longer be publishing our specialty catalogs which were being used as ‘look books’ by our customers to see what was new in the stores or online,” the spokeswoman says. “We have always served our customers by how they want to shop and now and in the future that’s online and in stores.” <internetretailer>

Hedgeye Retail’s Take:Good move to not wait until the paper catalog was completely dead. Near death, yes.

Juicy Hires Nealz - Juicy Couture, a division of Liz Claiborne Inc., has poached LeAnn Nealz, executive vice president and chief design officer at American Eagle Outfitters Inc., as its new president and chief creative officer. Nealz will be responsible for all creative aspects of the business, including product design, marketing and store design, and will report to Edgar Huber, chief executive officer of Juicy. Nealz succeeds Juicy co-founders and co-designers Gela Nash-Taylor and Pamela Skaist-Levy, who left their day-to-day responsibilities in January and took on nonoperating creative roles at the company. The duo plan to launch their own brand next year when their non-compete runs out. Nealz’s influence will be evident in late 2011.<wwd.com>

Hedgeye Retail’s Take: Finally, a new leader at Juicy, but the wait for an improving trend, updated product, and new strategy will still have to wait. Getting a leader however, is definitely a step in the right direction.

A&F Fined for Hiring Practices - U.S. Immigration and Customs Enforcement said Tuesday it reached a $1.05 million settlement with teen retailer Abercrombie & Fitch Co. for violating federal immigration laws by failing to adequately verify that employees in its Michigan stores were eligible to work in the U.S. According to ICE’s Office of Homeland Security Investigations, the settlement stems from a November 2008 inspection that uncovered numerous deficiencies in the chain’s electronic I-9 verification system, which is supposed to verify that workers are eligible to work in the U.S. ICE said they knew of no illegal aliens who were actually hired by A&F as a result of the technology deficiencies and that Abercrombie had since addressed the problems and implemented new company practices to prevent any future violations. <wwd.com>

Hedgeye Retail’s Take: Not quite as bad as hiring based on appearance, but still another negative HR related issue coming out of ANF.

Simmon's ArgyleCulture Relaunched at Macy's - ArgyleCulture, the three-year-old men’s collection for the “urban graduate” moving beyond the Phat Farm, hip-hop look, hasn’t exactly set the fashion world on fire. But the breakout moment has arrived, at least according to the designer and music mogul behind the brand, Russell Simmons. On Thursday, ArgyleCulture gets relaunched at Macy’s Herald Square with a new 750-square-foot shop, and Simmons starts his road show at Macy’s stores around the country to promote the brand. In addition, a fall advertising campaign with Tyson Beckford as the face of ArgyleCulture launches Oct. 11, and a tuxedo-ed Simmons will be splashed across the side of city buses. After that, Simmons takes another dive into reality TV with an eight-part series beginning Nov. 2 chronicling the making of ArgyleCulture. Terry Lundgren, chairman, chief executive and president of Macy’s Inc., which sells ArgyleCulture exclusively, will appear in several episodes with Simmons. <wwd.com>

Hedgeye Retail’s Take: Not many new apparel lines (especially men’s) get an entire reality show/tv series dedicated to it. Clearly Macy’s and Simmons are pulling out all the stops to make this work.

Big & Tall at Bon-Ton - The Bon-Ton Stores Inc. has signed an agreement with Casual Male Retail Group Inc. for Casual Male to supply big and tall men’s apparel through Bon-Ton’s e-commerce site and, beginning next spring, in a limited number of Bon-Ton’s 277 department stores. With the new alliance, Bon-Ton will expand the size and scope of its big and tall offerings, which will include sportswear, activewear, tailored clothing and accessories. A Bon-Ton spokeswoman said the availability of big and tall men’s wear will be flagged on Bon-Ton’s Web site, at bonton.com, but not the Casual Male association. <wwd.com>

Hedgeye Retail’s Take: Probably a low risk way for Bon-Ton to expand its offering without taking on too much risk. Will it move the needle? No. Still, an interesting combo and one that may open further doors for Casual Male’s big and tall expertise.

Vision Street Wear (PSS) Going South - Collective Licensing International reached a new three-year agreement with Town Connection of Buenos Aires to license apparel and skateboarding hardgoods for the Vision Street Wear brand in Argentina. Under the design and manufacturing agreement, Town Connection will hold the exclusive license for Vision Street Wear in Argentina and will initiate and drive the growth of the brand in this important international market for the brand. Town Connection's inaugural collection will debut in Spring of 2011 and this introduction will mark the first time Vision Street Wear has been available in Argentina since the brand's re-launch in 2009. <SportsOneSource>

Hedgeye Retail’s Take:Collective Brands has had success in South America with its other brands primarily in Columbia, but expanding branded product is right in-line with its strategy and what we expect to see more of through 2010.

Barefoot Run in NYC - Vivobarefoot and Tip Top Shoes, the leading independent family footwear store in New York City, will sponsor the largest-ever official barefoot and minimalist shoe run in New York City. The race will take place on Sunday, Oct. 10th, 2010 on Governors Island, NYC at 8:30 a.m. The first-of-its-kind event, entitled Barefoot Runners NYC, also includes "a weekend of educational, social, and athletic happenings to support the growing recognition that going barefoot, or as close to it as possible, is the healthiest way to be." <SportsOneSource>

Hedgeye Retail’s Take: Another positive step in the right direction for the barefoot/minimalist running movement. Recall that new players including New Balance are launching footwear to address the growing trend.

Retailer Online Performance Report - Online retailers’ web sales, conversion rate and average order value are all up this year, says a report released today by Forrester Research Inc., a research and consulting firm, and Shop.org., the e-retailing arm of trade association National Retail Federation.

Here are some of the most important metrics from the survey of 87 retailers:

Average online conversion rate is 2.9%. 54% of respondents say their conversion rate is up this year, 29% down.

Shopping cart abandonment rate is 55%, with 17% saying it’s higher than last year and 31% lower.

Average order value is $132; 47% say it’s higher than last year and 27% lower.

Web sales increased on average by 12% in the first quarter and 15% in the second quarter year over year for the retailers responding.

80% of retailers say their e-commerce business was profitable in 2009, and 70% say it was more profitable last year than in 2008.

Hedgeye Retail’s Take:More support for continued growth in e-commerce, as all key metrics for the industry are moving in the right direction. Interesting to see on an absolute basis just how low the conversion rate is for an online transaction.

Small Businesses Recalibrating Social Media Expectations - After climbing steeply, according to research from Network Solutions and the Center for Excellence in Service at the University of Maryland’s Robert H. Smith School of Business, small-business adoption of social media marketing has plateaued at 24%. The study of US small business found that those that do market via social media primarily use Facebook (82%), and that the most common activities are maintaining a company page on a social network and posting status updates or links to interesting content. About half of businesses that used social media also monitored brand chatter on social networks. As small businesses have gained experience with social media, some have realized their expectations for the channel did not line up with the reality of the social web. As the wider marketing world begins to look at social as more of a loyalty channel than one for acquisition, small businesses are also finding that their hopes for spreading brand awareness and attracting new customers have not been fully met. By contrast, somewhat fewer small businesses had expected to use social media as an engagement channel, but nearly two-thirds have had success in that area. <emarketer>

Hedgeye Retail’s Take:Perhaps the plateau has been hit as marketers and businesses alike are still trying to figure out how to effectively market via social networking. Clearly this is still a work in progress, even for large multi-billion dollar companies. Nonetheless, the real benefit to a small business lies within the fact that this is a low cost, low risk way to reach broader audiences.

Just For the Heck of It - Yusuke Sato says a man walked into his tobacco store in Atsugi, southwest of Tokyo, this month and bought 100 cartons of Mild Seven cigarettes. While they may not be good for his health, he may have saved $1,300. The man is one of thousands of smokers across Japan stocking up before Oct. 1 to beat a record 40 percent tax increase on tobacco. Their hoarding may add as much as 1.4 percentage points to this quarter’s annualized economic growth rate, according to estimates from the Japan Research Institute. <bloomberg.com>

Hedgeye Retail’s Take:Should be a good month for Costco Japan and other discounters selling cigarettes.

The Lands, Public Works and Transport Bureau Director, Jaime Carion, yesterday said there is no law in Macau that prohibits Sands China from selling its Four Seasons apartment-hotel under a co-op scheme but Sands needs to gain government approval regarding giving the title of the apartment-hotel to a subsidiary company. After this is approved, Sands can start implementing the co-op scheme without needing any further approvals from the government.

LESS TOURISTS VISITING MACAU IN THE MID-AUTUMN FESTIVAL macaubusiness.com

According to official figures, 460,000 tourists visited Macau during this year’s Mid-Autumn Festival, from September 22 to 24, a decline of 1.26% YoY. The majority of visitors came from mainland China, entering Macau by the Zhuhai Border Gate.

MACAU GOVERNMENT TO CURB PROPERTY SPECULATION macaubusiness.com

According to Secretary for Transport and Public Works, Lau Sio lo, the goal is to increase affordable housing supply while raising the transaction costs for speculators. Measures include: an increase in land supply for developers; full payment of the property transfer tax (ex. 1st-time buyers); and tightening of the LTV ratio for bank mortgages. More draft laws will be announced later this year.

CHINA PLANS TO INCREASE THE PROPERTY TAX TRIAL Xinhua News

According to Xinhua, China plans to expand the trial nationwide on a gradual basis. China is also asking commercial banks to suspend the offer of loans to buyers of third homes and to increase the prepaid deposit requirement to 30% or higher, says Xinhua.

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09/29/10 08:19 AM EDT

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 29, 2010

As we look at today’s set up for the S&P 500, the range is 19 points or -1.02% downside to 1136 and 0.64% upside to 1155. Equity futures are trading lower, tracking weak trading in European markets with doubts arising if the economic recovery can be sustained.

European markets are trading back below breakeven despite a positive start

Meanwhile, reports in the FT said the Irish government will inject a further €5B into the Anglo bank and that they will also announce plans to restructure some of the bonds. The FT and the Irish Times this morning report that the Irish government’s estimate of the final cost of bailing out Anglo Irish Bank could reach between €28-30B, below the €35bn estimate by S&P.

Elsewhere, while much of Europe is struggling to work amid strikes across the continent.

A Heavier Crash

“The lofty pine is oftenest shaken by the winds; high towers fall with a heavier crash; and the lightning strikes the highest mountain.”

-Horace

I haven’t considered a heightening probability of a US stock market crash in an Early Look note since 2008. I’ll go there this morning.

Before I look forward, allow me to take a step back. To fully appreciate the risk that is getting baked into this US stock market cake, we should respect history’s lessons. If you believe that the professional politicians of the Fiat Republics of modern day America and Japan have as much to lose as those in the Roman Empire did in 49BC, you’ll find my using a quote from the leading Roman lyric poet of that era appropriate.

I’m not a poet. I’m a Risk Manager. In probability speak, I am registering signals in my global macro risk management model that would consider an abrupt 1-3 day US stock market crash in October probable. To be clear, I’m not saying it’s likely – but I am saying it’s probable. There is a difference.

Probable is proactively predictable. Likely would be a better than 50% chance. What I see here is a 33% chance this happens, so let’s strap the accountability pants on and take a walk down that path. For a Heavier Crash to occur during a compressed period of time, we still need a few more things to happen:

We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.

We need to see volatility (VIX) get oversold towards 20.

We need to continue to see the world’s said “reserve currency” lose its credibility.

The bad news is that all 3 of these factors are already in motion, big time (since late August the SP500 is +10%, the VIX is down over -20%, and the US Dollar has been crushed to lower-intermediate-term-lows). If these 3 factors continue to travel the path of least resistance (SP500 up, VIX down, and US Dollar debauched), we could have a serious short term problem.

Measuring time and space is a critical aspect of my profession. As a chaos theorist, I don’t expect to be taken seriously by the gurus of buying cheap P/E’s, nor do I want to be. If the Ken Fishers of the world didn’t realize they were going to get smoked in 2008, I don’t see why they’d see it coming now. Evolving the risk management process is a dynamic exercise in and of itself. We all need to change as the market’s ecosystem does.

So what would a Heavier Crash look and feel like?

The most probable scenario that the perma-bulls would consider improbable is a 1-3 day correction on the order of -5.4% to -6.9%.

The least probable scenario in my model is an October 1987 type day (down -23%); I’d still consider that improbable, for now.

Now isn’t that a correction rather than a crash? If we eliminated that one little critter that the market calls expectations, yes, it might be. But relative to the expectations in this market today (this morning’s Bullish to Bearish Survey from Institutional Investor is seeing a +2400 basis point swing to the bullish side since the week US stocks closed at their late August lows), this could feel like a Heavier Crash than it might be considered in nominal terms.

What immediate term bearish data and price information in the land of global interconnectedness am I staring at in my notebook?

The SP500 is teetering on a critical line of support (my intermediate term TREND line of 1144); any slicing through that line on accelerating volume puts this bearish scenario back in play (again, that’s not what I would consider tail risk – it’s a probability to manage risk around)

Volatility (VIX) continues to trade with an extremely high inverse correlation to the SP500 with TREND line support for the VIX at 20.96

The SP500 is actually down for 4 out of the last 6 trading days and the market’s breadth is deteriorating

Financials (XLF) remain the only sector in the SP500 (of the 9 we model top-down daily) that’s bearish from a TREND perspective

Yield Spread (10s to 2s) continues to compress this week versus last and remains a bearish headwind for US Financial spreads and earnings

High Yield is trading within 7bps of its April 2010 highs at 8.25%; this is a contrarian indicator, big time

Levered Loan Index at 15.13 is 5bps away from its late April early May highs; another contrarian (bearish) indicator for equities

Case-Shiller Prices (JUL) rollover again sequentially (month-over-month) and we forecast the October 26th Case-Shiller report to be a bomb

Romania’s Interior Minister resigns in the face of austerity implementation

Sri Lanka is now issuing sovereign debt ($6B worth) and markets there are cheering it on?

Dubai says “we are back”

Acknowledging that there are plenty of bullish data points on the other side of this ‘QE is going to save us all’ expectation (there better be with the SP500 up +9.6% in a straight line from its August 26th low), I can only count 15 of consequence this morning - and that’s less than what I’d need to see for me not to call for a buckling of your chinstraps.

Horace’s lightening has already struck some of the highest mountains of buy-side and sell-side exposures in the last 3 years, but the lofty pines of professional politicians and the highest ivory towers of academic dogma that support them are still in for their heaviest crash yet.

My immediate term support and resistance lines for the SP500 are now 1136 and 1155, respectively. It’s not October yet. The SP500 hasn’t touched 1164 yet. So I’m not short the SP500 yet. Measuring time, space, and probabilities matter.

Best of luck out there today,

KM

Keith R. McCulloughChief Executive Officer

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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